The G8 has pledged a $3bn (£1.72bn) aid package for the Palestinian Authority.

Speaking at the Gleneagles summit, UK Prime Minister Tony Blair said the funds were to help Israel and the Palestinians co-exist in peace.

He described the package as a "contrast with the politics of terror", referring to Thursday's bomb attacks on London.

The G8 offer follows a pledge of $350m by the United States, some of which is to be spent on housing and infrastructure in the Gaza Strip.

But the US has refrained from larger contributions, preferring to channel funds to non-governmental organisations (NGOs) rather than the government, which US politicians accuse of corruption.

'Contrast with terror'

Mr Blair said last week he wanted the summit to focus on Palestinian living standards and help its government in the wake of the Israeli withdrawal from Gaza.

Announcing the deal, he told reporters: "We offer today this contrast with the politics of terror.

"Yesterday evening the G8 agreed a substantial package of help for the Palestinian authority amounting to up to $3bn in the years to come, so that two states - Israel and Palestine - two peoples and two religions can live side by side in peace."

The aid announcement comes ahead of Israel's withdrawal from Gaza, due to begin in August.

Israel is planning to pull out all 8,000 Jewish settlers and the troops that protect them. It will maintain control of Gaza's borders, coastline and airspace.